Decoding ITR-2: A Practical Handbook for Taxpayers

Income tax returns are crucial for taxpayers, as they provide a systematic approach for reporting their income, claiming deductions and exemptions, determining tax liability, and ensuring compliance with the Income Tax Act. If a taxpayer is an HUF or an individual whose total income is more than Rs 50 lakhs, they cannot file ITR 1 and have to go for ITR-2.

Latest Update

The Income Tax Department has enabled the online and Excel utility-based filing of the ITR-2 form for FY 2025-26. Taxpayers can now file ITR-2 through the Income Tax e-filing Portal.

Key Features of ITR-2:

• It covers salary and pension income. (Both Individual and HUF)
• It covers capital gains or losses on the sale of investment or property (both short-term and long-term).
• It also covers income from other sources (including winning from the lottery, bets on racehorses, and other legal gambling).
• ITR-2 also includes foreign asset schedules to report the foreign asset & income.
• In ITR-1, income from two house properties (w.e.f FY 25-26) is allowed, but in ITR-2, income from more than two house properties is allowed.
• It can also be filled by RNOR (Resident Not ordinary resident) & NR (Non-Resident)

Who Cannot File ITR-2?

• Those who have an income from business and profession.

Difference between ITR-1 and ITR-2:

Key Updates in ITR-2 for AY 2026-27 (FY 2025-26):

• Capital Gain Bifurcation: Share transactions must be reported separately, whether they occurred before or after July 23, 2024, till the last FY, but now they’re irrelevant for FY 25-26, hence such fields are abolished.
• Asset & Liability Threshold Raised: Only taxpayers who have an income above Rs.1 Cr need to declare assets and liabilities.
• Revised Capital Gains Tax Rates:

STCG under Section 111A is now taxed at 20% and LTCG under Section 112A at 12.5%, effective from July 23, 2024, per Budget 2024 changes.

Note: Assessed eligible for ITR 1 can also file ITR 2, but it’s advisable to avoid unnecessary reporting requirements to be filled in ITR 2

Common Mistakes to Avoid

• Reporting only salary income and ignoring Capital gain transactions leads to ITR-1 being filed incorrectly
• Not reconciling capital gains with AIS: mismatches trigger scrutiny notices
• Forgetting to disclose Schedule FA, even if no income from foreign assets
• Selecting the wrong regime (old vs new) without computing the comparative tax
• Not e-verifying within 30 days of filing
• Missing the carry-forward opportunity for capital losses by filing late.